Running a digital marketing agency, the one question we are frequently asked is:
How much should I spend on Google Adwords (PPC), Yelp ads, or Facebook and Instagram ads?
Below I outline a simple approach that you can use. The approach is not limited just to Google Adwords spend.
Going through this stepwise process has many benefits for you:
- How much should you spend to reach new customer goals?
- How to arrive at a recommended Google Adwords budget
- Clarification of expectations and new customer growth
- Understand how to make marketing accountable and pay for itself
Answering the question of how much you should spend depends on three factors:
- What are your goals for new leads, revenue?
- How much traffic do you need to reach your goals?
- What is the gap in spending between where you’re at now and where you need to be?
Step One: What Are Your Goals for Leads or Revenue?
The first step in the process can be eye opening. Ask yourself, what is your goal for new leads or revenue?
If the goal to grow leads is much larger from current results, the amount to spend in Google Adwords to achieve that target is equally significant. As you will see in just a moment, after someone goes through the process, they are often surprised at how much they have to spend to achieve the goal.
Let me walk you through a real example.
We have business-to-consumer (B-to-C) customer that provides mosquito control services. They indicated that they wanted to acquire 50 new customers per month over what they had done the prior year.
Currently, they do various guerilla marketing tactics and local tradeshows and had experimented with digital marketing the previous year. So let’s see how we can arrive at a realistic Google PPC budget for achieving their goal of acquiring 50 new customers over the previous year.
Step Two: How Much Is The Traffic Going To Cost?
The next step in estimating the Google Adwords budget needed to hit your goal is understanding how much it is going to cost you to acquire the traffic. With Adwords, we’re estimating this cost based on cost per click for keywords which we can find in the Google Adwords Keyword Planner.
A quick search for targeted keywords using the Google Keyword Tool shows that the average cost per click (CPC) is going to be approximately $5 for relevant terms.
The client has stated that they have a budget of $1,500 per month – based on the average cost-per-click, that would buy us 300 visits.
Here’s the simple math:
- Average cost per click in Google Adwords: $5
- Monthly Budget: $1,500
- Visits to your website: 300
Step Three: Website Conversion Rate
Understanding your conversion rates requires some digging into your site’s Google Analytics and perhaps call tracking metrics if you have. (here’s a post about call tracking)
For this example, when I mention conversions I am referring to people that have submitted a form, called you to request an appointment, or purchased your product or service.
If you’re not comfortable in your website’s analytics, perhaps your webmaster can help. However, generally speaking, for retail services we’re looking for form submissions (i.e. inquiries) and phone calls. If you don’t use call tracking, I can tell you that phone calls come in at 1-3 times the rate that a form submission does. So if you received 10 form submissions, you could reasonably assume somewhere between 10 – 30 phone calls too.
In general, for a retail services site, the conversion rates (forms + phone calls), if your site is well designed, are probably in the 10% range (your mileage will vary). If you are an e-commerce site, conversion rates are usually much lower and in the 1 – 2% range. However, to better understand this look to your website’s Google Analytics.
Calculating Website Leads:
Website conversion rate: 10%
Total website leads: 30 (10% * 300 website visitors)
Step Four: Lead-To-Customer Conversion Rate
This step is all about how effective you and your staff are at converting leads into customers. Any operational issues you have (i.e. low staffing, poor customer service, etc.) will greatly affect this variable. Operations are intimately tied to marketing effectiveness. Nonetheless, you should have a pretty good sense of this number – if you do not, I would make that a top priority. My experience in working with many different businesses is that their conversion rates when they get an inquiry via phone or email ranges between 50% to 90% (at least for retail services).
Total New Customers:
Lead to Customer Conversion: 60% (your ability to convert a lead to a customer)
Total New Customers: 18 (60% * 30)
Conversion rates in other channels outside of Google are a lot lower, so you have to be careful about applying this logic so concretely to Facebook ads, or Instagram ads, for example. However, because customers coming from Google are actively typing in queries, they are pre-qualified leads – we know they have a high level of interest because they typed in a search query. Customers coming from Facebook or other channels are not as pre-qualified primarily because they are not actively searching for your product or service since they are on the platform for other social reasons.
Pull It Altogether – Build A Simple Excel Model
I create these types of simple models in Excel, and then I change the monthly budget to see how my total new customers change with increasing or decreasing spend. Of course there are advanced Excel formulas you can use, but in this case, it’s just easy to vary your spend to see how your new customers change.
So getting back to our client that wanted 50 new customers per month – from this it’s clear that based on $5 per click and the website’s conversion rate along with the lead-to-customer conversion rate, $1,500 per month budget is not going to achieve their goals of 50 new customers per month. The client will need to spend over $4,000 per month to hit the goal. While $4,000 may be a lot for many small businesses, don’t get hung up on this – the point is to help you understand what is a reasonable spend to hit your goals. You can spend whatever you want on Google Adwords, but in doing so now, you will have a better sense of what’s realistic to expect for leads.
Making Sure It Makes Sense Financially – The Final & Most Important Step
The final piece of this process is making sure the cash flow and profit is there because if it’s not you have to fix one of these steps – either improve your margin (increase price or lower expenses), your website conversion rate, or improve lead to customer rate.
Let’s use the above example to calculate the financial return. Below are two financial ratios, return on ad spend (ROAS) and return on investment (ROI).
The ROAS is just sales derived from the effort divided by the marketing spend. For this client, average revenue was $500. Thus, ROAS is: ($500*48 new customers)/$4,000 in Adwords spend, so $24,000/$4,000 = 600% ROAS. This is a very healthy return. But what about taking into account the expenses to produce those sales? That’s where ROI comes in.
In comparison, ROI takes into account costs and profits. So if the client has 50%margin on $24,000 in sales, in other words, it cost $12,000 in labor or parts to produce those sales, that’s $12,000 in gross profit. Then subtract the Adwords expense of $4,000 from the gross profit of $12,000 which leaves us $8,000. Now that we’ve accounted for the expense to produce the sales, plus the marketing expense, the ROI is then, ($12,000 – $4,000)/$4,000 = 200% ROI.
I like ROI as a metric better because it takes into account margin/cost of sales, advertising expenses, and profit. Really what ROI has shown us is that out of $24,000 in revenue generated, we paid $12,000 in expenses to produce those sales (labor and parts) and we paid our $4,000 marketing expense which gave us 200% ROI. In essence, after all expenses, this effort generated $8,000 in cash flow! With those kinds of numbers, I would be making this investment continually.
Wrapping It Up:
This model can be used with any marketing channel. The real value comes from understanding that there are several main variables that will affect your success:
- Cost to acquire a customer
- Website conversion rate
- Lead to conversion rate
By adjusting these variables, you can gain better insights into how to be more successful and squeeze more profit from your marketing tactics and most importantly how to make marketing accountable.
A word of caution with other channels. While you can certainly use this approach, balance it with other KPIs (key performance indicators) like reach and impressions within your target audience for awareness. Facebook ads can send upwards of a 30% lift in conversions in other channels so it won’t receive all the credit it should.
Hope this has helped you answer the question of how much you should spend on Google Adwords and arrive at a monthly budget. Please leave me any comments or feedback below.